January 21, 2016 Reading Time: 2 minutes

Fascinating as the free fall in the stock prices might be, stock prices are not directly relevant to consumers. The Consumer Price Index, released on Wednesday, sheds light on the prices that households experienced in December 2015. Most goods were cheaper, while services were more expensive. Consumers were paying more for services than for goods, which is consistent with the trend over the past 20 years.

The headline CPI fell 0.1 percent in December from November 2015, mainly due to the sharp decline in energy prices. In addition to energy being 2.4 percent cheaper than last month, households also paid less for food. Food prices in December were down 0.2 percent from November, and they were down 0.9 percent from three months earlier.

But because food and energy prices are usually considered volatile, a better measure and a longer-term perspective on prices comes from the core CPI, which excludes food and energy. The core CPI in December rose 0.1 percent from November. Over the last 12 months, the core CPI advanced 2.1 percent. This is close to the Federal Reserve’s target of 2 percent inflation, which may help the Fed officials breathe a little more easily.

Among all goods in the CPI basket, households may have found most things were cheaper, from apparel to alcoholic beverages to new vehicles. Some exceptions included household furnishings and educational books and supplies. On the other hand, all services were more expensive across the board.

Taking the wider view, away from the monthly volatility, the data over 20 years shows how price trends for core goods and core services differ in the long run.

Households have consistently been paying more for services than for goods in the last two decades. Goods (excluding food and energy) grew at an annualized 0.2 percent over the past 20 years, while services (excluding energy) advanced at a 2.8 percent annual rate. Among all services, the fastest growing category is education (up by 5.1 percent annually), followed by medical care (rose about 3.8 percent every year).

Compared to the long-term growth, the recent volatility presents a stark contrast. Oil prices continued to plunge, and the stock market picked up the drama, causing big market turmoil. With all of this going on, it doesn’t seem an option for the Fed to raise interest rates at its January meeting.

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Jia Liu, PhD

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